Branch or wholly-owned subsidiary company? Choosing legal form for MNC’s wholly-owned operations in Finland

Abstract

This thesis studies multinational corporations’ (MNC) choice of the legal form of their wholly-owned equity-based foreign market entry mode (FMEM) when they enter the Finnish markets. Legal differences between wholly-owned equity-based FMEMs have not been paid much attention to in the international business (IB) literature. This thesis aims to start a related scholarly discussion by demonstrating that there are different legal forms and that the choice of the legal form has relevance from the business perspective.

To achieve this goal, this thesis clarifies the legal differences between the two most popular legal forms of wholly-owned equity-based FMEMs in Finland, i.e., a wholly-owned subsidiary company (WoSC) and a branch. Further, it aims to identify potential business implications of these differences for the MNC when choosing one legal form over the other.

This thesis is interdisciplinary in nature. It combines legal research and IB research. The legal differences between the two legal forms are identified by legal research methodology. Literature on the choice between the subsidiary company and the branch on the one hand, and the agency theory on the other hand, are used as tools for identifying potential business implications of the legal differences for MNCs.

This thesis argues that the choice of the legal form is not merely a trivial administrative decision but can also entail substantial risks, costs, opportunities and/or benefits that may have a great significance for the success of the foreign market entry. Among other things, this thesis argues that due to their separate legal personality, WoSCs can be used as a tool to isolate the financial risk of the WoSC from the rest of the MNC. To compare, as the branch is legally a part of a foreign entity, it enables transferring assets more freely within the MNC. This strengthens the ability to withstand financial shocks, to a certain extent. Further, it is argued that the WoSC form is more suitable for mitigating agency problems of the firm’s management than the branch structure. From an income taxation perspective, the WoSC structure offers a greater level of certainty and simplicity compared to the branch form. Comparatively, the branch form is more beneficial when it comes to the deductibility of losses of the Finnish operations in the income taxation of the foreign entity.

This thesis should be understood as a conversation starter. By demonstrating that the choice of the legal form matters from the business perspective, it encourages IB scholars to pay attention to legal form-related considerations in FMEM research and to further study the topic from different perspectives.